Chinas Predatory Lending

The Chinese government has a bad reputation when it comes to finances. Most countries including the developed ones like the United States believe that the Chinese government regularly manipulates and outsmarts them.

Now imagine if the strong Chinese government went up against smaller nations like Sri Lanka, Nepal, Pakistan, and Bangladesh! There would be no match for the sheer strength and intelligence of the Chinese firms, isnt it? That is exactly what has happened in these countries. The Chinese have virtually decimated the economies of Sri Lanka and Pakistan with its predatory lending. Nepal and Bangladesh have also been affected but not to that extent.

In this article, we will understand the motivations behind Chinas predatory lending as well as the effects it has had on countries like Sri Lanka and Pakistan.

Chinas Intentions behind the Loans

The Chinese government has been lending money to many developing nations around it. Although China is also still a developing country, it is aiming for regional superiority. The main adversary of China in this regard is India. Apart from India, nobody in the region even comes close to Beijing regarding wealth or influence. By providing debt to countries that share land or sea borders with India, China is making friends close to the enemy territory!

Also, these loans have been given away on terms that are making it likely that the borrowers will default. This ensures that China has control over land and sea resources in the subcontinent. They can then use it to build strategic military bases and further enhance their economic competencies.

Lastly, China wants to build a road linking it to mainland Europe. This route if built via China will dramatically cut export costs. At the present moment, ships have to sail across the India subcontinent before they move further west into Europe. China needs the cooperation of several nations like Pakistan and Iran to achieve this. What better way of eliciting cooperation that making the other party deeply indebted to you!

The Sri Lankan Financial Massacre

Sri Lanka has been a country in the civil war for the past two decades. Infighting and rampant military operations had decimated the infrastructure in the country. If the country had to move towards a growth trajectory, the only way out was to build world class infrastructure. This is where the Chinese were supposed to be of help.

China lent out huge sums of money to Sri Lanka. This money was used in several ambitious projects. It was used to build the Hambantota port. Some of the money was also used to build the Mattala airport which is today one of the worlds emptiest international airport. China also invested billions into building a port city which is defunct today. Ambitious railway lines and road projects were also undertaken. Once again, the results were less than impressive.

The result of all this is that Sri Lanka is in a debt trap today. It owes $64 billion to outsiders. Out of these $64 billion, $8 billion is owed to China! The debt to GDP ratio is appalling, and a contracting Sri Lankan economy makes it impossible to service this debt. The Sri Lankan government has been borrowing money to service its old loans. Recently, the IMF had to intervene and provide a bailout package to Sri Lanka. Sri Lanka still has to make $4 billion in debt payments in 2017 and has no way to do so.

This dire state of affairs can be attributed to China. Firstly, China induced Sri Lanka into many of these projects stating that they will become viable after the One Belt One Road (OBOR) project becomes a success. Then China offered loans to Sri Lanka at double the rates. Sri Lanka has been borrowing money from IMF and World Bank at 1% to 3% interest. China lent out money to Sri Lanka at 3% to 6% interest. This is one of the biggest reasons why the Sri Lankan debt has spiraled out of control so fast.

At the end of it all, China took over the asset like a predatory lender. China now has a 99-year lease on the Hambantota port because of the inability of the Sir Lankan government to service its debt. The Sri Lankan government is trying hard to negotiate with the Chinese to accept more equity in lieu of debt. This will leave China with a very hefty military presence on the foothills of rival India. The end result makes one wonder whether this was Chinas plan all along.

The Pakistan Fiasco

Like Sri Lanka, Pakistan has also borrowed about $50 billion from Chinese banks at high-interest rates. The China Pakistan Economic Corridor is the only hope for Pakistan to revive a failing nation. However, China is using its financial muscle to bully Pakistan. Most critics of the CPEC observe that the benefits are lopsided. They only accrue to China which is dictating terms. Pakistan is merely doing as told by Beijing. The cost of the project has shot up by several billions. Pakistan is heavily indebted to Beijing. According to experts who study the issue closely, Pakistan may not get any benefits for 40 years after the CPEC becomes operational. This is because they will be repaying the loans along with substantial interest during that time.

Seeing Pakistan and Sri Lankas economic condition, Nepal and Bangladesh have wised up. They are scrutinizing every deal that China is offering to avoid a future of debt enslavement to the Chinese.

Authorship/Referencing - About the Author(s)

The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.